The Singapore Airlines (SIA) C6L group is grateful to all customers, shareholders, partners, staff and stakeholders for their continued support, which it does not take for granted — after three years of interrupted operations and multiple rounds of fundraising, the final line of SIA’s press release announcing its record earnings for FY2023 ended March 31 is certainly music to shareholders’ ears.
On May 16, SIA posted the highest net profit in its 76-year history, with earnings of $2.16 billion standing in stark contrast to the previous year’s $962 million loss and the $4.27 billion loss it suffered in FY2021.
SIA mainline passenger traffic was stable q-o-q, reaching 88% of 2019 levels. Meanwhile, budget brand Scoot’s passenger traffic improved 11.6% q-o-q, returning to normal levels during the period. Despite a 6%–7% sequential dip in passenger yields across SIA and Scoot, these were still 20% and 37% above 2019 levels, respectively, during the quarter.
FY2023 was not a lumpy financial year either — the group recorded relatively even 2HFY2023 earnings of $1.23 billion, compared to a $125.2 million loss in the corresponding period.
Total revenue for the year was $17.78 billion, marking a record surge of 133.4% y-o-y. Passenger-flown revenue surged by 376.3% y-o-y to $13.37 billion as traffic grew by 449.9%, outpacing the capacity expansion of 94.0%.
Shareholders will receive more than just SIA’s gratitude. A final dividend of 28 cents has been declared, bringing full-year payout to 38 cents, equivalent to a payout ratio of 52%. For context, DBS Group Research was expecting a full-year payout of just 25 cents.
SIA’s board did not pay any dividend in the two prior financial years. Its interim dividend for 1HFY2023 ended Sept 30, 2022 was its first payout since an eight cents per share interim dividend for 1HFY2020. SIA’s total dividend for FY2023 is also higher than in its last pre-pandemic financial year; the group paid a total dividend of 30 cents per share for FY2019 ended March 31, 2019.
Unchanged from the previous results briefing in November, however, SIA’s leaders shied away from committing to a dividend policy. “The decision will be based on a judgement of the board at that point in time,” says CEO Goh Choon Phong.
UOB Kay Hian’s Roy Chen, who has upgraded his call from “sell” to “hold”, calls the dividend a positive surprise but warns that the payout going forward might taper off in line with the “normalisation” of earnings. Nonetheless, with a much stronger balance sheet, Chen, who has raised his target price to $5.75 from $5.35, believes SIA can resume and maintain a payout ratio of 70%.
With signs of a recovery already evident from its 1HFY2023 results last November, the airline is not just a retail investor darling. So far this year, SIA shares have attracted the third-highest net institutional fund inflows within the Singapore market, according to Singapore Exchange market strategist Geoff Howie. This comes after SIA booked the 10th-highest net institutional fund inflows in 2022, he adds.
In 4QFY2023 ended March, SIA reinstated services to Guangzhou, while Scoot resumed services to Balikpapan and Qingdao. Its network now covers 109 destinations in 36 countries and territories; SIA serves 74 destinations while Scoot serves 58 destinations. The cargo network comprises 118 destinations in 38 countries and territories.
While the airline guides for lower yields, forward sales remain healthy across all cabin classes, led by a strong pick-up in bookings to China, Japan and South Korea. For the “Northern Summer operating season”, or March 26 to Oct 28, SIA will expand its services to China with the resumption of Scoot’s flights to Haikou, Ningbo and Xi’an in April; Nanning and Shenyang in May; Jinan in July; and Nanchang in August.
“We are extremely excited about the reopening of China,” says Lee Lik Hsin, SIA’s executive vice president (EVP) of commercial. “Obviously, it will take some time for everybody in the industry to be properly ready. But it is starting to come in and we are optimistic about the full resumption.”
Outstanding bonds
See also: SIA chalks up 1HFY2022/2023 records, but tempers yield expectations
SIA announced on May 10 that it will redeem half of its mandatory convertible bonds (MCBs) issued in June 2021 for some $3.4 billion, or 108.243% of the principal amount of $3.1 billion. This was earlier than expected.
Now, with such record earnings, what is holding SIA back from redeeming the remainder of its MCBs, issued in 2021?
The decision to redeem the MCBs affects equity and SIA’s balance sheet, explains Tan Kai Ping, EVP of finance and strategy. “So, these are long-term questions, not short-term. We have to move step by step.”
SIA’s strong performance allowed the group to redeem half the 2021 MCBs, adds Tan, but there are currently no plans regarding the remaining MCBs. “We have to take a very longterm view regarding this decision.”
The group has raised a total of $23.5 billion in liquidity since April 2020, “the highest that any airline has raised”, notes CEO Goh.
The 2020 and 2021 MCBs, worth $3.5 billion and $6.2 billion respectively, were part of the $15 billion rights issue that was approved by SIA’s shareholders in April 2020, which also included $5.3 billion in 2020 rights shares. SIA redeemed the 2020 MCBs in December 2022, and the group will do the same for half of the 2021 tranche on June 24.
SIA’s cash and bank balances rose $2.5 billion y-o-y to $16.3 billion at the end of FY2023. Net cash generated from operations, including proceeds from forward sales, contributed $9.1 billion, while the group paid $3.9 billion for the redemption of the 2020 MCBs.
In addition to the cash on hand, the group continues to retain access to $2.2 billion of committed lines of credit, all of which remain undrawn.
Bringing staff back
For the year, the group’s staff costs doubled y-o-y to $3.05 billion, which Tan attributes to the absence of government grants and provision for employee profit-sharing bonus owing to the record earnings. Harking back to the good old days, SIA is reportedly paying its rank and file a bonus of eight months.
Goh says the group began rehiring cabin crew in February 2022, “before Singapore reopened borders”. “We have taken quite proactive steps in hiring new staff… Since then, we have recruited about 3,000-plus new crew. Of course, they have to go through training.”
Goh says the current headcount is “sufficient”, but staff count now is still lower compared to pre-pandemic figures. According to Tan, the group ended the year with “slightly over 24,000 people”, up 12.3% y-o-y.
SIA announced on Sept 10, 2020 that it would cut some 2,400 jobs, and the group’s prior annual report then revealed a headcount of some 27,619 staff. Its annual report for FY2022, released in June 2022, placed this figure at 22,222, down from 25,547 the year prior.
Low costs, weak cargo
Staff costs aside, fuel was still SIA’s biggest expense item, accounting for 34.5% of the cost versus 20.3% for manpower.
During the year, the group’s expenditure grew 83.4% y-o-y to $15.08 billion. This included a 138% y-o-y rise in net fuel costs, a 61.5% rise in non-fuel expenditure, and a $77 million increase from the y-o-y impact of fair value changes on fuel derivatives. Net fuel cost rose to $5.2 billion, mainly due to the 49.6% increase in fuel prices and higher volumes uplifted, and this was partially offset by higher fuel hedging gains of some $530 million.
As at May 5, the group has hedges in place up to 3QFY2025, with some US$66 million ($88.7 million) in additional gains locked in from closed-out trades in the current FY2024 and US$44 million in the subsequent financial year.
Spot jet fuel prices fell from US$134/bbl in mid-May 2022 to US$90/bbl on May 16, with the crack spread against Brent crude narrowing from an average of US$28/bbl in FY2023 to the current US$15/bbl, notes CGS-CIMB Research analyst Raymond Yap.
On the other hand, in line with a slowing global economy, the air freight business remains “very weak”, says Yap in a May 17 note. SIA’s continuing sequential yield declines extended into April, while SIA’s cargo volumes have declined y-o-y for the 13 months to April.
As such, Yap maintains “hold” on SIA with a target price of $6.15. He expects passenger yields to continue moderating in the years ahead as a result of price competition from other airlines that are gradually ramping up capacity. “All things considered, we forecast SIA to report a core net profit of $1.3 billion in FY2024, down 35% from FY2023’s $1.9 billion, while we think SIA’s FY2025 core net profit could decline another 22% to $993 million.”
On the other hand, a team of DBS Group Research analysts led by Paul Yong is bullish as ever. “We believe recessionary fears are overblown and the street is severely underestimating SIA’s earnings potential,” state the analysts in their May 18 note, where they maintain their “buy” call and $6.80 target price.
“We continue to have above-consensus earnings projections and believe that SIA will continue to deliver positive surprises in the near term to catalyse a re-rating,” they add.
Sustainability takes flight, but slowly
In July 2022, SIA, the Civil Aviation Authority of Singapore and Temasek’s GenZero announced a pilot to deliver blended sustainable aviation fuel (SAF) to Changi Airport via the airport’s fuel hydrant system. Under this pilot, 1,000 tonnes of neat SAF were supplied by Finland’s Neste and blended with refined jet fuel at ExxonMobil’s facilities in Singapore.
The pilot is due for completion in the coming months. Goh says the group is entering a contract to purchase more SAF, but declined to confirm if the supplier will again be Neste.
Meanwhile, passenger response for optional carbon offsets, available for purchase since June 2021, has been tepid, says Goh. “The takeup is not strong. We will continue to try to encourage [this], but at the end of the day, it will be up to individual passengers to decide.”
